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Italy's carrier seeks buyout to break fall

January 21, 2008|Tracy Wilkinson | Times Staff Writer

ROME — You know you're a troubled airline when even Aeroflot refuses to buy you.

Italy's national air carrier, Alitalia, spent much of 2007 searching unsuccessfully for a buyer. The airline is heavily in debt, loses about $1.6 million a day, is plagued by strikes and is saddled with an aging, fuel-guzzling fleet.

One suitor after another, including Aeroflot, dropped out of bidding last summer for the Italian government's 49.9% controlling stake of Alitalia. An executive from discount carrier Ryanair said he wouldn't take Alitalia if it were handed to him on a silver platter.

Thusly spurned, Alitalia executives and the government revamped their proposal, streamlined a "survival plan" and are again looking for rescue.

A new deal may now fly. Exclusive negotiations are starting with Air France-KLM, the world's largest airline by revenue. The Franco-Dutch company has eight weeks to decide whether to make a binding offer for Alitalia.

"This is the best prospect for saving the air carrier," Italian Finance Minister Tommaso Padoa-Schioppa said.

Alitalia Chief Executive Maurizio Prato said he hoped a final deal would be struck quickly because the airline "is on its last legs."

"There is no more time for other attempts," he said.

The government of Prime Minister Romano Prodi chose to enter the talks with Air France-KLM after debate over whether the national carrier should remain in Italian hands.

Alitalia's problems are deep-rooted and structural. In many ways, the carrier is a symbol of the basic flaws in Italy's stagnant economy, held back by outdated business practices, the inability to compete and a failure to modernize. Labor unions are very powerful and the most senior managers are political appointees.

The airline travel market in and out of Italy is strong and has been expanding -- hence Air France's interest. But Alitalia has managed to steadily lose its market share, in part because of fast-growing, low-budget carriers but also because of its failure to provide good service and competitive fares, analysts say.

Alitalia's share of lucrative international flights to and from Italy, as measured by passenger seats sold, fell from 32% to 26% in the last two years, even as the overall volume increased nearly 20%.

Passengers tell tales of bathrooms that don't work (even in business class) and of cabins with equipment that is falling apart. Strikes a couple of times a year have forced the cancellation of hundreds of flights.

The Assn. of European Airlines last year ranked Alitalia near the bottom among major European carriers for service, mainly because of late flights and lost baggage.

Alitalia is teetering under a debt of about $1.7 billion, and its finances are in such disarray it could well cease to operate in months if not saved, analysts say.

"Everything has been going wrong for Alitalia at the same time. When in the current market it isn't an option to do nothing, Alitalia has basically done nothing," said Peter Morris, an expert in the airline industry and former chief economist of the International Air Transport Assn.

"The validity of Alitalia's business model is being tested," Morris added, "and getting thumbs down from everyone from consumers to investors."

Any solution to the travails of Alitalia will involve a series of politically problematic steps that Prodi's weak government will have to navigate.

Opposition to a possible deal with Air France has already made itself heard in some quarters. The Air France bid was chosen over one by AP Holding, the parent company of Italy's largest private carrier, Air One.

Some officials in Prodi's center-left government, as well as key politicians and business leaders, favored AP Holding as a way to maintain the Italian character of the airliner.

If the merger goes through, executives of Alitalia and Air France-KLM say they anticipate refocusing on Rome's Leonardo da Vinci airport as the carrier's principal hub, a shift away from the Malpensa airport outside Milan in northern Italy.

That possibility has inflamed north-south tensions and angered officials from Milan and the surrounding Lombardy region. The Northern League, a right-wing party that favors devolving power to the regions, is accusing the Prodi government of "selling out" national interests and is threatening potentially disruptive protests.

The rescue plans for Alitalia are also expected to include cuts of as many as 1,700 jobs, which could trigger wildcat strikes. So far, however, unions representing pilots, flight attendants, ground crews and others have said they want to be included "urgently" in the takeover negotiations.

Air France has also said it would pour about $1 billion into the struggling airline, which would be purchased through a share-swap arrangement. If the deal succeeds, Air France-KLM would be able to increase significantly its share of international passengers and could see its annual revenue grow to more than $35 billion, by some projections, up from an estimated $28 billion in 2006.

The Franco-Dutch giant is also offering to renew Alitalia's fleet of MD80 short- and medium-range planes and B767 long-range aircraft, as well as to overhaul cabin design and ground services.

During an initial round of talks in Rome last week, Air France-KLM CEO Jean-Cyril Spinetta sought to reassure skeptics and tantalize supporters of a possible tie-up.

"The objective," he said, "is to build a grand European champion."



Alitalia at a glance

Fleet: 186 aircraft

Passengers per year: about 25 million

2006 revenue: 4.373 billion euros, or $6.4 billion

2006 profit/loss: loss of 626 million euros, or $911 million

Destinations in U.S.: New York, Boston, Chicago and Miami; through codeshares it serves Los Angeles and dozens of other American cities. Plans to add an L.A. route in June.

Source: Alitalia; Dow Jones

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